6/02/2009 @ 5:34PM

The Reverse Bank Run

More proof we’re not in another Great Depression: The people storming teller windows at teetering banks these days are clamoring to put money in, not take it out.

In a curious twist to the traditional bank run, Americans seeking high yields on their money are causing deposits at struggling banks to mount in seeming lockstep with their troubles. The result is that banks that should fail are sticking around longer, making the cleanup when they do fail more costly. Banks taken over by the FDIC recently have saddled the agency with losses equal to a third of seized assets, double the level in the last banking crisis in the early 1990s, according to law firm Jones Day.

At Silverton Bank of Atlanta, the worse the news got about its bum construction loans, the more the money poured in. Before it was seized in May its so-called brokered deposits–money pooled from rich folks then shopped around for high rates–stood at $1.4 billion, quadruple the level nine months earlier.

At another reckless lender, First Bank of Beverly Hills, brokered deposits nearly doubled in the year before it collapsed in April. Ditto for another recent wipeout, First Bank of Idaho. One of this recession’s biggest failures, BankUnited of Florida, managed to triple its brokered deposits in just 1.5 months last year, though that money ebbed before it was seized.

The problem is it’s the banks in bad shape that often offer the highest rates on deposits, and many people apparently either don’t know about the troubles or, more likely, don’t care: The FDIC has done a good job (perhaps too good) reassuring them that if they don’t put too much money in one place it will pay them back when the banks no longer can.

Things have gotten so bad that Gerard Cassidy of RBC Capital quips he regularly checks bankrate.com to pick out the next likely failures. That’s a Web site that lists lenders offering the highest CD rates. He’s only half joking. A perennial near the top of the list:
GMAC
, the bailed-out lender.

Another chart topper is Corus Bankshares of Chicago. Nearly half of Corus’ loans, by dollar value, are non-performing, a level nearly unheard of in the annals of banking.

Yet dollars rush in. According to bankrate.com, Corus recently was willing to pay 2.18% for a six-month CD, a half percentage point higher than the average bank. A third of Corus deposits now are either brokered CDs or deposits over $100,000.

Of course, people poured cash into shaky thrifts during the S&L crisis of the 1980s too. But a few things could be making losses bigger now when banks fail.

The Internet has allowed investors to hunt for rates on their own, so money flows more freely these days. The recent decision by Congress to raise FDIC coverage to $250,000 hasn’t helped either.

Then there’s another dangerous source of easy money for lenders, which has gotten scant attention: the quasi-governmental Federal Home Loan Banks. Since the last credit crisis they have been allowed to lend to more banks.

The FDIC has been complaining loudly about brokered deposits and other kinds of easy funding for months now. On Friday it tweaked rules to give it more freedom to stop struggling banks from hiking rates.

But don’t expect too much progress.

For starters, the agency has only a quarter of the staff it had in the early 1990s. It’s also hobbled by a Balkanized regulatory regime: Often it cannot clamp down on a bank until one of the two other federal agencies overseeing the industry moves first.

The Obama administration’s proposal to invest oversight power in a single agency may help, but that better happen soon. The FDIC now says 305 banks may collapse, up 20% from its last estimate. RBC analyst Cassidy says he expects more like a thousand to go bust.